Where does herding collide?

In behavioural finance, herding is the tendency of investors to converge on the same trades by copying what others are doing rather than acting on their own information or analysis. Bikhchandani and Sharma's 2000 Herd Behavior in Financial Markets surveyed how such imitation can push prices away from fundamentals and amplify booms and crashes, and separated true herding, where investors abandon private information to follow the crowd, from spurious clustering, where investors merely react alike to the same public news. Devenow and Welch's 1996 Rational herding in financial economics showed the copying can even be individually rational. The referent is a pattern of correlated trading driven by imitation among people, not a formal updating rule, a crowd's mood, or animals massing in a field.[1][2]

Unit

One investor's trade that follows others rather than own information, aggregated across a market

Recovery means

Not applicable

Measured by

Estimated from correlated trading, the dispersion of returns around the market, or the clustering of buy and sell decisions

In economics, an informational cascade is the point at which it becomes optimal for a person to ignore their own private information and act instead on the choices they have watched others make. Bikhchandani, Hirshleifer, and Welch's 1992 A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades modelled how, once a few early actors line up the same way, each later actor rationally infers that the crowd knows more than their own weak signal, so information stops accumulating and everyone copies. Here the copying is a precise consequence of watching others in sequence, not a vague crowd feeling. The referent is a formal decision rule about when private signals get discarded, which differs from a market's trading pattern, a crowd's emotional pull, or an animal's clustering.[3]

Unit

One actor's decision to discard a private signal and follow observed predecessors

Recovery means

A cascade can reverse when a strong new public signal arrives, since it rests on very little private information

Measured by

Demonstrated in sequential-choice experiments and models where people choose after seeing others' choices

In social psychology, herd behaviour is the alignment of people's behaviour, beliefs, or feelings through observing and interacting with one another, ranging from deliberate copying to automatic mimicry and emotional contagion. Raafat, Chater, and Frith's 2009 Herding in humans drew together the social and cognitive mechanisms behind this convergence, from conformity to shared attention, and stressed that much of it is unconscious and emotional rather than a cold calculation. The referent is the broad psychological pull to fall in line with others, which is wider and less deliberate than the economist's cascade, and unlike the biologist's herd it is about matching minds and moods, not spacing bodies for safety.[4]

Unit

One person's behaviour or belief shifting toward those of others

Recovery means

Not applicable

Measured by

Studied through conformity experiments, coding of mimicry, and models of opinion or emotional convergence

In behavioural ecology, herding is the tendency of animals to gather into tight aggregations, and the selfish-herd theory explains it as each individual moving to put others between itself and a predator. Hamilton's 1971 Geometry for the selfish herd showed mathematically that if each animal shrinks its own zone of danger by moving toward neighbours, a compact herd forms without any cooperation, coordination, or copying of information. The referent is a spatial pattern of bodies produced by individual survival geometry, an evolved outcome of avoiding predators. It shares the word with the social meanings but not the mechanism: nothing here involves discarding private information or matching beliefs, only positioning to reduce personal risk.[5]

Unit

One animal's position relative to neighbours, shrinking its own zone of danger

Recovery means

The aggregation loosens once predation pressure falls, since it is driven by risk

Measured by

Modelled by zones of danger and tested by observing spacing and clustering under predation